Disciplines of Private Equity that Any Corporation Can Use with L.E.K.’s Peter McKelvey
Disciplines of Private Equity that Any Corporation Can Use with L.E.K.’s Peter McKelvey


my name is Peter mckelvey I’m the
president Americans region for L.E.K. consulting and my areas of focus are
private equity and life sciences there are a number of reasons why private
equity is so successful but probably the single most important is a focus on
shareholder returns private equity firms exist for one reason and one reason only
and that’s to maximize the returns on the fund that’s been invested and
entrusted to them if you look at the data of how well the private equity
industry is performed it is truly remarkable really doesn’t matter what
time period pick 3 years 5 years 15 years 25 years or what index you pick
either a bond index small-cap index the S&P 500 there’s a consistent three to
six hundred basis points premium that private equity firms return visa V other
benchmarks there are a number of reasons behind that phenomenal performance data
but what we try to do is boil it down to six specific disciplines for why we
believe private equity firms consistently outperform other forms of
ownership when private equity firms look to pursue transactions one of the things
they do quite successfully is focus their search and what they’re looking
for around a focused investment thesis a industry theme a long term trend a major
discontinuity that’s happening in industry and therefore how that’s likely
to affect the long-term returns of investments in that space relationships
are critical in private equity with very successful private equity executives is
they’ll begin relationships with CEOs several years before they’re actually
contemplating a transaction and on the basis of those long-term relationships
and that networking is how private equity firms establish themselves in a
deal flow and get access to transactions that would necessarily be available to
to other entities one of the major reasons why private equity firms are so
successful doing acquisitions is that they are very focused and systematic and
how they diligence an asset obviously they do the legal and the accounting but
on the strategy side they will do a very thorough understanding of the
market environment a very thorough understanding of what customers are
presently thinking and how that thinking is likely to evolve they’ll do a very
systematic analysis of the competitive environment and whether or not the asset
they’re acquiring has a good probability of having a protected niche or a niche
that will allow them to learn to earn long-term shareholder returns a fourth
thing that private equity firms do really really well is to activate a
strategy after they’ve done an acquisition they do this by first
articulating the goals very early on in the life cycle of them owning an asset
and then secondly very quickly activating those goals in focused plans
sometimes it’ll be very focused tactical things in the first hundred days other
times it’ll be things that are stretched off over a period of years like for
example follow-on acquisitions or entering new markets or exploiting new
technologies any private equity firm will tell you that the management team
is just as important as the company of the asset that you’re buying and one of
the things that private equity firms do extremely well is first of all identify
top flight management teams or second if they have an underperforming team they
don’t hesitate or wait to replace that team and bring in a new team to achieve
the objectives that they’re trying to achieve the six discipline that we see
private equity firms deploying quite well is very much aligning the
incentives of the management team with the incentives of the shareholders and
so that by that I mean a shareholders incentive is to be able to resell the
asset create a dividend stream and resell the asset at a much higher value
than the original cost basis and if you look at the major component of the
senior management teams compensation it’s directly aligned to achieve him
that objective for the shareholders at L.E.K. we are privileged to work with
many high-performing both public and private companies the six disciplines
that we’ve talked about here today can really apply to either type of entity
public or private small or large enterprises domestic or international
and virtually any sector of the economy

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